Mass. DPU Approves Nonbypassable Charge for Cape Wind Above-Market Costs

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November 23, 2010

Finding that National Grid's proposed method of cost recovery is not prohibited by statute, the Massachusetts DPU approved National Grid's power purchase agreement with Cape Wind, including its petition to recover above-market costs from all distribution customers through a nonbypassable charge (10-54).

Retail suppliers and industrials had opposed the proposed nonbypassable method of cost recovery, arguing that National Grid could not make use of a nonbypassable surcharge since it is not selling the energy and RECs under the PPA into the market, and instead will apply such energy and RECs to its basic service requirements.

However, while statute provides for a nonbypassable surcharge in cases where the products under a PPA are sold into the market, the statute is silent, the DPU said, with respect to the use of a nonbypassable surcharge in cases where the products are applied to basic service.

"In light of this statutory silence, we are not persuaded ... that Section 83 expressly prohibits National Grid's proposed ratemaking treatment.  Interpreting Section 83 to prohibit National Grid from recovering any above-market contract costs from distribution customers would require the Department to read words into Section 83 that the Legislature did not see fit to include," the DPU held.

The DPU further said that the PPA, "will provide economic benefits to all of National Grid's customers.  The Department's long-standing ratemaking precedent requires that the customers who benefit should be the customers who pay."  

The Department further agreed with National Grid's claim that the benefits that basic service customers will realize from the contract will not differ from the benefits realized by all distribution customers.

Furthermore, although the PPA's products will not be sold into the market, the DPU said that the PPA will not affect basic service rates either, finding that all customers should thus bear above-market costs equally.  

"The Company's proposed method of calculating the market value of the PPA-1 products and recovering that market value will have no material effect on basic service rates.  Under the Company's proposal, the market value that the Company will ascribe to the energy purchased under PPA-1 will be equal to the revenue that the Company would receive if it were to sell the energy directly in the wholesale energy market.  Moreover, with regard to the RECs purchased under PPA-1, it is reasonable to conclude that, with the exception of transaction costs, the market value that the Company will ascribe to the RECs under its proposal would be equal to the revenue that the Company would receive if it were to sell the RECs in the REC market.  This is so because the Company proposes to establish the market value of the PPA-1 RECs based on the average price it pays for the non-PPA-1 RECs it purchases in the REC market for the purpose of complying with its basic service RPS obligation.  Therefore, under the Company's proposal, basic service customers will pay the same rates they would have paid absent PPA-1," the DPU said.

"Accordingly, AIM and RESA are incorrect in asserting that: (1) the PPA-1 benefits realized by basic service customers will be different from those realized by competitive supply customers; (2) competitive supply customers will be subsidizing basic service customers; and (3) the Company's proposed cost recovery treatment will have an adverse effect on the competitive supply market," the DPU held.

"The Company's proposal will not have any impact on the competitive supply market because basic service rates will not change.  Instead, basic service rates will remain the same and all customers will benefit in the same way from the products purchased pursuant to PPA-1.  Therefore, we find that it is appropriate to recover any above-market costs of the contract from all distribution customers," the Department said.

Energy from the Cape Wind contract will initially be priced at 18.7¢/kWh in 2013, with an annual escalation of 3.5% for a term of 15 years.  The DPU approved a PPA in the amount of 234 MW between National Grid and Cape Wind, but rejected a second PPA between the parties for the remaining half of Cape Wind's output, under which National Grid would have attempted to find another party to assume the output of the second PPA.

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